Articles: Civil Litigation

Reservation of Rights Letters: What are They and What Should You Do if Your Association Receives One?

Your Association gets sued by a homeowner. You reach out to your insurance company to let them know about the lawsuit then you sit back and relax because insurance is going to cover everything, right? Do not get too comfortable!

Insurance companies may not cover everything, or anything, that you believe they should. How do you know what the carrier is going to cover during the course of this particular lawsuit? Look no further than the reservation of rights (“ROR”) letter. Your insurance company is required by law to provide you, as its insured, with a reservation of rights letter detailing all possible limitations on coverage that the insurer may rely on in connection with adjusting the claim or suit.

Basic Definitions

Before we can understand what the insurance company is saying in its ROR letter, we need to understand the jargon that’s typically included in the letter. The following definitions provide the basics.

Duty to Defend: Used to describe an insurer’s obligation to provide you with a defense to claims made under an insurance policy. As a general rule, an insurer’s duty to defend you arises when there is potential for coverage under a policy.
Duty to Indemnify: Used to describe an insurer’s obligation to pay the claim, by funding a settlement or paying a judgment against the insured. Unlike the duty to defend, which is typically determined at the outset of the litigation, the duty to indemnify arises when the facts establish that there is a covered loss under the policy.
Tender: Under the terms of your insurance policy, you must give your insurance carrier notice of any claim or suit being made against the Association. Such notice includes a demand for defense (i.e., duty to defend) and indemnity (i.e., duty to indemnify) under the policy.
Trigger or Coverage Trigger: Refers to the event that must occur before a liability policy applies to a given loss.

What is a Reservation of Rights Letter?

The ROR letter will be a letter from your insurance company which notifies you of the carrier’s coverage position, including any limitations on coverage that may act as a complete or partial bar to coverage. The ROR letter also affords the insurer an opportunity to undertake a more thorough factual investigation into the claim without waiving its rights to deny or limit coverage at a later date.

ROR letters vary in form depending upon the insurance company but, in general, include a summary of the factual background surrounding the current claim, a detailed analysis of the applicable insuring agreement and applicable exclusions (i.e., intentional acts, breach of contract, no monetary damages being sought) and endorsements which may impact coverage, a reservation of rights, and, in some instances, a denial of coverage for some or all of the claims. Since ROR letters may be long and winding with insurance terms and phrases peppered throughout, they are difficult to understand.

What are the Insurance Company’s Duties (Refer to Definitions Above)?

The duties of an insurance company are set forth in the Insuring Agreement section of the policy. Typically, an insurer has two distinct duties – the “duty to defend” and the “duty to indemnify.” In California, the duty to defend is “triggered” when there is any possibility, no matter how remote, that the claim would be covered under the policy. Where your carrier defends an entire action where only a portion of the claims are covered, the carrier may seek reimbursement from you for any defense fees and costs incurred in defending the non-covered claims.

Under the typical scenario where an insured is faced with a third-party claim for monetary damages, the carrier is obligated to defend the action if, under the facts known, there is a possibility of coverage under the policy. Once a carrier’s defense obligations have been “triggered”, the carrier is obligated to hire counsel, retain experts, investigate the claim, pay defense costs, and defend the case through disposition.

The duty to indemnify is the insurance company’s duty to pay any monetary judgment (i.e., damages) rendered against an insured for a covered loss. A carrier’s indemnity obligations are limited by the terms of the insurance contract and should be detailed in the ROR letter.

Why is an ROR Letter Important?

California’s insurance regulations require an insurance company to provide you with a written response to a request for defense and/or indemnity. That response typically comes in the form of the ROR letter which puts you on notice of any limitations or exclusions to coverage. Knowing what is, and more importantly what is not, covered under the policy is crucial to making strategic decisions regarding the handling of the claim. By way of example, the ROR letter can assist the Association and its defense counsel in evaluating a settlement demand and determining whether or not it is in the Association’s best interests to settle a claim. However, it is worth noting that the decision to settle typically rests entirely with the insurance company.

The ROR letter is also how an insurance company reserves its rights to either deny or limit coverage under the policy and to recover defense fees and costs expended in connection with the defense or settlement of uncovered claims. Under California law, the carrier’s coverage defenses may be waived where the insured relies upon the carrier’s failure to specifically reserve its rights under the policy.

What Should You Do if Your Association Receives an ROR Letter?

Receiving an ROR letter from an insurance company may feel intimidating. However, knowing what to do and what to look for when you receive an ROR letter are crucial in getting a handle on the carrier’s coverage determination.

Your first step when you receive an ROR letter should be to share it with your attorney.
The next step is to carefully review the policy exclusions and endorsements and discuss them with your insurance professional so that you can work within your budget to buy the broadest coverage available.

Potential Liability for Non-Employee COVID-19 Infections: See’s Candies, Inc. v. Superior Court

Employers may be held liable for COVID-19 (“COVID”) infections of non-employees, as evidenced by a recent California Court of Appeal decision.

In the recent case of See’s Candies, Inc. v. Superior Court, (Dec. 21, 2021, No. B312241) [2021 Cal. App. LEXIS 1076], the California Court of Appeal, Second District, found that an employer that has not taken adequate measures to prevent the spread of COVID in the workplace may be held liable if an employee contracts COVID at work and spreads it to a third-party, such as a spouse, if the third-party suffers a resulting injury. The court did not resolve the extent to which the employer’s duty of care reaches, however.

In See’s Candies, Matilde Elk caught COVID in March 2020 from working in close proximity to others on a packing line for her employer, Elk quarantined in her home, where her husband resided. Her husband subsequently caught COVID and died a month later.

Elk and her daughters sought wrongful death damages, including for loss of love and care. Elk claimed her husband’s death results from her employer’s failure to implement adequate safety measures, such as social distancing in the packing line room and restrooms.

Under the California Worker’s Compensation Act, Labor Code §§ 3200-6002, an employer’s liability for an employee’s workplace injury is generally limited to worker’s compensation. California courts had long established that this restriction on workplace injury remedies also applies to injuries collateral to or derivative of a workplace injury. See’s Candies argued that this rule, known as the “derivative injury doctrine,” should therefore limit its remedies to Ms. Elk’s family members to worker’s compensation, rather than open the door to widespread civil liability and remedies.

The court disagreed with See’s Candies. The court paralleled the circumstances in this case to a 1997 California Supreme Court Case, Snyder v. Michael’s Stores, Inc. (16 Cal. 4th 991) in which a minor with cerebral palsy and other disabling conditions claimed such conditions were a resulting injury of her exposure to toxic levels of carbon monoxide while in utero. This exposure occurred because her mother, while pregnant, was working as an employee at Michael’s when an incident involving carbon monoxide occurred. The Court found that the derivative injury doctrine did not remove the company’s civil liability to the baby because the harm to the baby was not dependent on, or derivative of, the harm to the mother. Rather, the harm to the baby was a result of her own exposure to carbon monoxide as a fetus.

In See’s Candies, the appellate court held that the derivative injury doctrine only applies when the third-party’s injury is derivative of the employee’s injury in the purest sense, meaning the injury to the third-party would not have happened in the absence of the injury to the employee. The court explained that, like the mother in Snyder, Elk merely served as a conduit of a pathogen and whether she had been harmed by the pathogen itself was irrelevant to the claims of her family members.

What Does this Mean for Your Association?
This case serves as a reminder that the best way your Association can protect itself from COVID liability is to follow the applicable governmental orders designed to help prevent the spread of COVID. As we all know, these orders change from time to time.

If you have any questions regarding the current orders or how to implement them, please contact us. We are here to help!

Temporary Restraining Orders & Preliminary Injunctions for the Protection of Association Workers and Board Members

In response to escalating violence in the workplace across the country, California enacted a statute that enables employers to better protect their employees in the workplace by permitting employers to obtain an injunction or restraining order on behalf of their employees. This law was enacted to establish parallel provisions to the civil harassment statute set forth in California Code of Civil Procedure section 527.8 to offer protection to “employees” of community associations in certain specific situations. “Employees” include association board members, community association managers, vendors and others for purposes of these restraining orders.

Purpose of the Statute

The purpose of the statute is to provide employers with a fast and relatively inexpensive means of protecting its employees from people who are violent or who threaten acts of violence against employees. In the association context, this protection allows employees to perform association business free of the fear of violence from those who seriously disrupt an otherwise peaceful community.

Often tempers will flare and disagreements will occur within an association when an unpopular decision is made. Residents sometimes show anger against board members, committee members, officers of the Association, management or maintenance people who are carrying out the decisions of the Board. These residents may try to stop a project or say inappropriate things to association employees. When these actions or comments consist of a violent act or a credible threat of violence, CCP Section 527.8 can be used to protect the employees. Unless the conduct escalates into violence or threats of violence, however, mere anger or inappropriate language do not constitute the type of conduct which calls for court action under this statute.

Who is Defined as an “employee” Under this Statute?

An association need not have traditional paid employees to obtain the benefit of the statute. The following people qualify as “employees” under CCP Section 527.8:

Board members, officers, committee members, and volunteers of an association;
Paid employees of an association, such as maintenance workers and grounds keepers or other persons employed at the workplace;
Most independent contractors and vendors, including Community Association Managers and those who work for association management companies;
Anyone whose job it is to go onto association property to perform work of any kind, whether paid or on a volunteer basis; and
All household members of an “employee.” There does not have to be a specific threat or act of violence toward each family member to obtain this additional protection.

Prerequisites to Obtaining the Injunction

There must be: (1) an actual violent act; (2) a credible threat of violence; or (3) stalking of the “employee.” Mere harassment cannot be enjoined under this statute unless the harassment involves a course of conduct that serves no legitimate purpose and causes the employee to fear for his/her personal safety or the safety of his/her immediate family members. Often, the threatening conduct has gone on for months or years, but becomes increasingly more frequent and threatening over time. One extremely violent or threatening act or episode, however, may be sufficient for an injunction to be granted.
The person to be protected must be an “employee” of the Association. Homeowners and tenants, who are not classified as employees under the statute, are not covered and must obtain their own restraining orders.

The Process for Obtaining the Temporary Restraining Order

Obtaining a permanent order protecting the employee is a two-step process. First, the association completes the necessary forms or paperwork and files it with the court to try to obtain a Temporary Restraining Order (“TRO”) from the local superior court. This order is what the name implies; it is temporary, is granted on very short notice if the association shows that the employees has suffered unlawful violence or a credible threat of violence, and provides almost immediate protection to the employee. Once the TRO is granted, it must be personally served on the respondent for the order to be enforceable. After the TRO is granted by the judge, the court will hold a future hearing to determine whether to make the order more permanent. This hearing is generally held within 25 days after the TRO is granted. At that time, the association must be prepared to prove with credible evidence including witness testimony that the order should be made permanent or for a specific period of time up to a maximum of three years.

What Can TROs and Injunctions do for an Association and its Employees?

The kinds of protection that can be included in these orders include the following:

All TROs and injunctions under Section 527.8 include the following standard language:

Violation of this order is a misdemeanor, punishable by a $1,000 fine, one year in jail, or both, or may be punishable as a felony. This order shall be enforced by all law enforcement officers in the State of California. Any person subject to a restraining order is prohibited from obtaining or purchasing or attempting to obtain or purchase a firearm by Penal Code Section 12021. Such conduct may be a felony and punishable by a $1,000 fine and imprisonment.

In addition to the automatic order above, the orders may prohibit the respondent from:

assaulting, battering or stalking the employee and other protected persons;
attending any board meetings or annual meetings of the Association;
following or stalking the employee to or from their place of work;
following the employee during hours of employment;
telephoning or sending communications to the employee by any means including but not limited to the mail, interoffice mail, fax, e-mail; or entering the workplace of the employee.

The orders will often require the respondent to “stay away” from the employee. For example, the order may require that the respondent stay 100 to 300 yards away from the association’s community (if a non-resident), the employee or the employee’s family members, the employee’s workplace, and/or the school and workplace of the employee’s family members.

Conclusion

This legal tool should be utilized in appropriate cases after consultation with counsel. It is an important tool that can be used by an association to stop violent and abusive people from harassing, intimidating and threatening employees within the Association that serves no legitimate purpose and causes the employee to fear for his/her personal safety or the safety of his/her immediate family members. Utilizing this statute in the appropriate manner can assist in trying to maintain a safe working environment for an association’s workers, community association managers, and board members.

The Litigation Discovery Process for Beginners

Litigation can be complex, expensive, time consuming, and contentious! These same four words can be said of discovery, the process whereby each side learns the facts supporting the other side’s case.

Litigation and discovery, in fact, go hand in hand, and although difficult at times, it is important to understand the process and appreciate why it is not only necessary but a powerful and important tool.

Discovery, or the “discovery process,” is exactly what the name implies:

It is the process of discovering evidence to prepare your case for trial.
It also involves discovering the evidence of the other party.

The purpose of discovery, and the ideals behind it, is to promote the truth-seeking function of litigation. In other words, it is designed to make trial less of a game and more of a fair contest.

There are two broad categories of discovery: Written Discovery (which includes interrogatories and requests for production of documents, the two most common forms), and depositions.

Interrogatories: Interrogatories are nothing more than written questions prepared by the attorney and sent to the other side. The opposing party is then required to answer the questions and affirm, under oath, the answers are true. These questions are usually very specific, asking for information such as dates and times, descriptions of events and even the identification of witnesses.

Requests for production of documents: Not surprising, requests for production of documents require the other party to produce documents in that party’s possession which are relevant to the case. The determination as to what is or is not relevant hinges upon the particular facts of the matter at hand; there is no “one size fits all.” Unlike interrogatories, requests for production of documents may be sent to non-parties. Non-parties are individuals or business entities that are not involved in the lawsuit but may possess documents that contain information that is relevant to it.

Depositions: A deposition is a sworn statement of a party or a witness that is given in the presence of a court reporter. The court reporter records the questions asked of the witness and the answer he or she gives. The court reporter then converts the recording into a written transcript that can be used at trial if the witness is unavailable. The deposition transcript can also be used to ensure the witness does not change his or her testimony at a later date.

Ultimately, discovery enables a more comprehensive understanding of the facts and allows for more informed and strategic decisions as the case is being prepared for trial. Having a clear path on which to navigate also increases the possibility the case may settle.

Because of this, investing time and effort in the discovery phase can have considerable cost savings later on down the road!

Budget Cuts Continue to Affect the State Courts, or "Justice Delayed is Justice Denied"

The State of California is in a fiscal crisis and the Courts of the State are not immune to this crisis. The Court system in California is divided up into counties. Each county has its own courts that operate partly on revenues generated from filing fees and local taxes and partly on funds from the Sacramento. Each county is dealing with the budget crisis in slightly different ways but the bottom line is that services offered by the Courts that we once took for granted are either no longer being offered or are being scaled back severely. For example, many counties do not provide court reporters for hearings or trials. It is now up to the litigants to contract with court-approved court reporters to attend and record the hearing or trial. The office hours for the Court Clerk’s office have been reduced, meaning that it is harder to file and retrieve documents with the Courts. Staff has been reduced both in the courtroom and the Clerk’s office. This means that it is taking much longer for the Court to process and return important documents such as dismissals, default judgments, abstracts of judgment, etc.

In San Diego County, the number of research attorneys supporting the judges has been drastically reduced. This has resulted in the Courts having to set motion hearing dates out further and further in the future to allow time for the limited number of research attorneys to thoroughly review the motion papers, research the law and provide the judge deciding the matter with a preliminary opinion. We are seeing hearings for such routine matters such as demurrers and motions to compel discovery responses being set six months or more in the future as opposed to pre-budget cut times when such motions were generally heard within sixty days or sooner.

In the face of a $9 million shortfall in its budget for fiscal year 2014-2015, the San Diego Superior Court has recently announced further cuts that will affect the administration of justice. Effective December 22, 2014, the Kearny Mesa Small Claims Courthouse will be closed and all operations, hearings and trials will be transferred to the Hall of Justice and Central Courthouse in Downtown San Diego. In addition, effective January 5, 2015, the Civil Appellate Departments in the San Diego North, South and East County Divisions will be closed and all case filings will be transferred to the Central Division.

This means that Associations filing Small Claims lawsuits will now have to file the lawsuit in the Central Courthouse and all Small Claims hearings will be held in the Central Courthouse. The Kearny Mesa facility on Clairemont Mesa Boulevard will close, effective December 22, 2014.

“The wheels of justice turn slowly, but grind fine.” (Attributed to Sextus Empiricus circa 500 A.D.) It seems that those wheels will be turning even slower due to the most recent budget cuts.

Attorneys’ Fees Incurred in Prelitigation ADR: Grossman v. Park Fort Washington Association

Are attorney’s fees expended for Alternative Dispute Resolution (“ADR”) before litigation recoverable by the prevailing party in subsequent litigation under the Davis-Stirling Act?

In Grossman v. Park Fort Washington Association (2012) 212 Cal.App.4^th 1128, the California Court of Appeal, Fifth District, determined that attorneys’ fees and costs incurred during prelitigation ADR are recoverable if two conditions are met: (1) an action is brought after the prelitigation ADR proceeding to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.

Grossman involved a dispute between the Association and two homeowners who built a cabana and fireplace in their backyard without the Association’s approval. The homeowners requested a variance for the unapproved structures which the Association denied based on its interpretation that the governing documents prohibited the cabana and fireplace. The Association informed the owners that the cabana and fireplace had to be removed and imposed a fine of $10 per day until the structures were removed.

The Association and the homeowners thereafter agreed to mediate the dispute as required under former Civil Code §1369.520 (current Civil Code §5930). The case did not settle at mediation and the homeowners filed a lawsuit alleging that the Association improperly interpreted the governing documents in refusing to approve the cabana or grant a variance and in imposing fines against them.

The trial court disagreed with the Association’s interpretation of the governing documents and held in favor of the homeowners finding that the Association’s governing documents allowed the cabana and the fireplace as long as the fireplace was more than 10 feet from the property line. Judgment was entered in favor of the homeowners and the fines imposed against the homeowners were rescinded.

The homeowners filed a motion for an award of their attorneys’ fees and costs as the prevailing party in the action. In their application for fees and costs, in addition to seeking an award of their fees and costs incurred during the lawsuit, the homeowners also asked for an award of their fees and costs incurred in connection with the prelitigation mediation. The Association opposed the motion arguing that the attorneys’ fees and costs incurred in conjunction with the prelitigation mediation were not authorized under former Civil Code §1354(c) (current Civil Code §5975(c)).

The trial court again disagreed with the Association and awarded the homeowners $112,665 in fees and costs which included fees for the prelitigation mediation. The Association appealed and the court of appeal affirmed the trial court’s award of attorneys’ fees and costs, including those that were incurred in the prelitigation mediation.

The appellate court carefully analyzed former Civil Code §1354(c) and held fees incurred during prelitigation ADR may be included in an award of reasonable attorneys’ fees and costs if two conditions are met: (1) an action is brought after the prelitigation ADR to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.

The court of appeal reasoned that since former Civil Code §1369.580 (current Civil Code §5930) essentially makes ADR mandatory, for a court to deny reasonable attorneys’ fees incurred in pursuing prelitigation ADR would be contrary to the strong public policy of promoting the resolution of disputes through mediation and arbitration. The court of appeal determined that public policy is served in interpreting former Civil Code §1354(c) (current Civil Code §5975(c)) in a manner that awards reasonable attorneys’ fees and costs incurred in prelitigation ADR proceedings.

Electronic Discovery: Preserving Electronically Stored Information

Advances in technology have caused significant changes in the way civil discovery is conducted. Before the advent of the computer age, most documentation was easily identified as paper. Today, however, documentation is more likely to take the form of an email, text message, or computer file. Just as society’s method of communication has evolved, so has the law. California’s Electronic Discovery Act (Code of Civ. Pro. § 2016.010 et seq.) allows litigants to obtain electronically stored information (“ESI”) through the discovery process. As a result, when a party reasonably anticipates litigation (whether by filing a lawsuit or by being sued) there is a duty to preserve all ESI that may be discoverable.

What is “ESI”?

ESI should be defined as broadly as possible. ESI includes any information stored electronically, magnetically, digitally, or optically, such as email, voicemail, instant messages, text messages, sound or video recordings, word processed documents, spreadsheets, and other similar electronic media. Devices used to store, produce, and transmit ESI include computers, laptops, servers, cellular phones, handheld wireless devices, and the like. ESI also includes information about electronic data called “metadata.” Metadata is a hidden recorded history about an electronic file’s creation, modification, location, and size, which can be vital to a document’s significance in litigation.

When does the duty to preserve ESI arise?

The duty to preserve ESI arises when a party reasonably anticipates litigation. Since there is no bright-line rule as to when litigation can be “reasonably” anticipated, it is best to preserve ESI at the time a dispute arises, whether a lawsuit has been threatened or not.

Who does the duty to preserve ESI extend to?

In the case of a common interest development (homeowners associations, planned developments, condominium projects, community associations, maintenance associations, etc.), directors, officers, committee members, managers, agents, and employees all have a duty to preserve ESI once litigation is anticipated. Additionally, any vendor, consultant, or other third party who may have ESI related to the dispute has a duty to preserve that ESI. For example, if the dispute is over financial expenditures, the association should notify its accountant in writing to preserve ESI in his or her possession that is related to the dispute. The same applies to other vendors, depending on the nature of the dispute. If a director utilizes his work email account, computer, or cellular phone to conduct association business, his employer would also be subject to the duty to preserve ESI under its control. Extending this preservation duty to the director’s employer as a result of communications outside the scope of the director’s employment can have negative implications for the director as well as the association if the ESI is not properly preserved. Therefore, directors and committee members should be careful from where they send and receive email, and from what account. Directors should consider setting up a separate email account solely for association business. Associations may also consider creating their own domain name and supplying email addresses to its directors and committee members.

What do I need to do to preserve ESI?

Once litigation is anticipated, refrain from deleting or destroying any ESI that exists. Enact procedures to prevent future deletion or destruction of ESI and ensure that all automatic computer operations that delete ESI by age, capacity, or other criteria are turned off. Do not overwrite or erase any back-up media and do not use any defragmenting or compression programs, or metadata scrubbers. Note that when ESI is “deleted” it can still be recovered. Therefore, be careful to preserve all ESI at the appropriate time. The penalties for failing to preserve ESI can be significant, and the penalties for purposely deleting or destroying ESI can be even worse.

How do I properly dispose of ESI when litigation is not anticipated?

The association should implement a policy on ESI destruction and deletion for use during times when litigation is not anticipated. If the association has such a policy in place (for example, ESI will be purged after five years if no litigation is anticipated), it will be harder for a challenging party to claim that evidence has been improperly destroyed than if ESI is randomly deleted.

In a time where email and text messages are often a more common means of communication than speaking face-to-face, associations must be aware where the duty to preserve ESI arises and to whom it extends. Every time you push the send button, you are creating a potentially discoverable document. Protect your association from potential discovery challenges and penalties by enacting proper policies on the use and storage of electronic information.

Election Propaganda: Is It Protected Speech?

In the case of Silk v. Feldman (2012) 208 Cal.App.4th 547, the California Court of Appeal, Second District, was asked to determine whether letters sent to the membership of an Association by a board candidate constituted an exercise of free speech.

Sherrill Silk and Philip Feldman each owned units within the residential beachfront development known as Malibu Bay Club. Between 1996 and 2000, Silk served on the Association’s Board of Directors. Feldman became a board member in 2009.

During the time that Silk served on the Board, the Association was involved in a lawsuit that was brought by the son of the developer to establish ownership over 36 parking spaces located within the development. In 1999, the case went to trial and the trial court ruled that the developer’s son rightly owned the parking spaces along with another portion of the Association’s common area. Based on that ruling, the parties held a mediation and settled all remaining issues in the case. The settlement was negotiated by the attorneys for the respective parties, and was later approved by the boards of the respective parties. Following the settlement, a full disclosure of the settlement was made to the Association’s members at numerous meetings, and through the publication of letters to the members, including the community newsletter.

Shortly after the settlement was reached, the developer’s son began offering the parking spaces for sale to the general public and to the members of the Association for $25,000 per space. In December 2003, [four years after the parking spaces first went on the market] Silk purchased six parking spaces for $114,000 or $19,000 per space.

In 2009, Feldman, an attorney, wrote a letter to the members of the Association on his law office letterhead that encouraged members of the Association to vote for him in the upcoming Board election. Feldman’s letter further noted that Silk [who was also an attorney] was running for the Board and to promote himself over Silk, Feldman accused Silk of overseeing the prior lawsuit for her own personal gain.

Later that year, Feldman sent a second letter to the members which stated in part:

… Silk was on the Board and without the knowledge of the lawyers who settled the Knox matter, she and [the Board’s] president cut secret deals to purchase nine parking spaces for themselves with manufactured rights to use our beach along with each space. They never revealed what they did and never apologized. Successive ‘friendly’ boards kept their secret for a decade.

Silk sued Feldman for defamation. In response to the lawsuit, Feldman filed a special motion to dismiss the lawsuit as a Strategic Lawsuit Against Public Participation (“SLAPP”) claiming his statements were an act of free speech and were therefore protected. A “SLAPP” lawsuit is an unmeritorious action brought by one litigant for the illicit purpose of misusing the legal system to chill the opposing party’s exercise of the constitutional right of free speech or right of petition guaranteed by the Federal and California Constitutions. The trial court denied Feldman’s motion to dismiss the lawsuit and he appealed.

In refusing to dismiss the lawsuit, the Court of Appeal eloquently stated that “not all speech is free” and that “speech can be costly.” The court found that Silk was likely to prevail on her claim against Feldman because Feldman’s letter accused Silk of a serious breach of her fiduciary duty as a director which amounted to libel per se and that the accusations against her were false.

Moral of the story: One should make sure any accusations made in campaign materials are accurate as it could cost you more than a seat on the board.

Ameron Case Summary—Expanding the Definition of “Suit”

The Board of Directors is sometimes faced with a challenging question—does the association’s insurance company have a duty to defend the association or provide insurance coverage in a particular situation? The answer is often unclear, particularly when terms are left undefined in the association’s insurance policy. In the Ameron case, the California Supreme Court provides guidance on this issue. [Ameron International Corporation v. Insurance Company of the State of Pennsylvania, et al. (2010) 50 Cal. 4th 1370)]

Factual Background & Proceedings

Beginning in 1975, the United States Department of the Interior, Bureau of Reclamation (“Bureau”) contracted with Peter Kiewit Sons’ Company (“Kiewit”) for the fabrication and installation of concrete siphons used in the Bureau’s Central Arizona Project aqueduct. Kiewit then subcontracted manufacture of the siphons to Ameron International Corporation (“Ameron”), requiring it to defend and indemnify Kiewit in the event the siphons proved defective.

In 1990, the Bureau discovered defects in the siphons that required their replacement at a cost of approximately $116 million. In 1995, the Bureau’s contracting officer issued two final decisions finding Kiewit responsible for the siphons’ defects and seeking almost $40 million in damages from Kiewit and Ameron. Kiewit and Ameron challenged the contracting officer’s decision before the United States Department of Interior Board of Contract Appeals (“IBCA”). Ameron provided timely notice to its insurers.

The IBCA administrative law proceeding lasted 22 days and concluded when Ameron and Kiewit settled the Bureau’s claims against them for $10 million. Following the settlement, the majority of Ameron’s insurers generally failed or refused to pay for the cost of defending or indemnifying Ameron in the litigation before the IBCA.

In 2004, Ameron, for itself and as the assignee of Kiewit’s rights, filed a complaint against its insurance providers, alleging causes of action for breach of contract, breach of the covenant of good faith and fair dealing, declaratory relief, waiver and estoppel,and contribution. Ameron claimed that the insurance companies failed or refused to defend or settle the Bureau’s claims against it before the IBCA, failed to indemnify it for the IBCA settlement, and neglected to investigate the potential for coverage.

The trial court granted the demurrers of the insurance companies and dismissed Ameron’s complaint. The trial court held that the IBCA proceeding was not a “suit” that would trigger an insurance company’s duty to defend its insured or provide insurance coverage. The Court of Appeal reversed in part and held that the insured could recover under certain comprehensive general liability policies that defined a suit as a civil proceeding. The California Supreme Court granted review.

Supreme Court Observations & Conclusions

The Supreme Court observed that case law interpreting comprehensive general liability policies has defined a suit, absent a definition of the term in the policy, as a proceeding brought in a court of law by the filing of a complaint. Applying contract interpretation rules to determine the parties’ intent and to resolve ambiguity, the Supreme Court concluded that because the Contract Disputes Act describes an adjudicative proceeding as a “suit” and characterizes of the initial pleading as a “complaint,” the parties to an insurance contract would have reasonably intended that such a proceeding was a suit, thus trigging the defense and indemnity provisions in the insurance policies.

Community associations should be aware of the implications of the Ameron case. If a community association’s insurance policy does not define “suit,” there is a compelling argument that any administrative proceeding may trigger defense and indemnity obligations of the association’s insurer. This may result in the association’s insurance carrier having to provide legal counsel and/or pay for defense of the action.